US Stimulus Worked?

Sullivan says the US economic stimulus worked because of a natural experiment comparing the US and the UK.  The United Kingdom did not adopt a stimulus.  Sullivan notes. “After three and a half years, U.S. GDP is just about returning to the pre-recession peak. That’s awful. But it’s far better than the U.K. where GDP is still five percent ($750 billion in US terms) below its pre-recession peak.”  Of course, two data points is just an anecdote and ceteris paribus does not apply, but this is about as good as it gets in macroeconomics.  I have yet to see an example of austerity working better than stimulus. 

Keynes vs. Hayek Debate

This might be a good essay for Macro
Bloomberg
BBC
Rap video
PBS

Friedman Supported Quantatative Easing

Beckworth:

did Milton Friedman actually recommend doing successive rounds of quantitative easing until nominal spending returns to normal levels? Let's have Milton Friedman speak for himself.  Here is an excerpt from a Q&A following a 2000 speech he delivered at the Bank of Canada (my bold below). 

David Laidler: Many commentators are claiming that, in Japan, with short interest rates essentially at zero,  monetary policy is as expansionary as it can get, but has had no stimulative effect on the economy. Do you have a view on this issue?

Milton Friedman: Yes, indeed. As far as Japan is concerned, the situation is very clear. And it’s a good example. I’m glad you brought it up, because it shows how unreliable interest rates can be as an indicator of appropriate monetary policy.

During the 1970s, you had the bubble period. Monetary growth was very high. There was a so-called speculative bubble in the stock market. In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it’s been in a state of quasi recession ever since. Monetary growth has been too low. Now, the Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?”

It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.

The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.

So yes, Milton Friedman did call for buying longer-term securities until a robust recovery takes hold.  He also notes that policy interest rates can be a poor indicator of  the stance of monetary policy.   I suspect, however, that Friedman would have preferred that such a monetary stimulus program be done in a more systematic manner than that of announcing successive, politically costly rounds of QE.  Imagine how much easier all of this would have been had the Fed announced a level target from the start and said asset purchases will continue until the level target was hit.  There would have been no need to announce the large dollar size of the asset purchases up front that attracts so much criticism.  There would also have been no need to announce successive rounds of QE that make it appear the previous rounds did not work.  More importantly, it would have more firmly shaped nominal expectations in a manner conducive to economic recovery.  The question is what type of level target would Friedman have supported?  This 2003 WSJ article indicates he might have liked a nominal GDP level target.

Finance Profits a Ripoff?

Yglesias » The Economics of Ripoffs:

The great genius of capitalism is facilitating mutually beneficial exchanges. I want a can of Diet Coke more than I want 8 pesos, so I hand 8 pesos over to a shopkeeper and he hands me a can of Diet Coke. Win-win. Then there’s fraud where you outright lie about what’s happening. That we understand, and it’s generally illegal.
But there’s this whole other world where, to a greater or a lesser extent, one party to the transaction is getting ripped off. We know this stuff happens. People buy lottery tickets, people put tokens into slot machines, and people pay fortune tellers. You can model all this behavior as self-interested and mutually beneficial by simply asserting that the people buying tickets are obtaining some large quantity of subjective utility from the lottery, but I think examining lottery marketing tends to cut against this interpretation. And this can move up from the realm of pure gambling. I saw a TV ad the other day marketing life insurance to AARP members. The idea of life insurance is that average payouts are less than average premiums (hence profit), but this bad investment may still be a good idea for your family because the economic impact of the loss of a breadwinner will be so devastating. But the whole logic of life insurance completely fails to apply to retired people.
I thought of this all recently in terms of continuing discussions of the mysterious sky-high profitability of the financial sector.
We often have this conceit that ripoffs are an economically marginal phenomenon that applies to, sure, tourists and gambling addicts and maybe naive poor people going to see tarot card readers. But if you look at the price premium people are willing to pay for “organic”-labeled products and the dubious science behind the theory that these products are superior to conventional varieties, I think it’s clear that yuppies aren’t immune to getting ripped off, either. And I think we should be open to the possibility that this is happening in finance. How much do the sundry pension fund beneficiaries, 401(k) holders, endowed nonprofit managers, etc. of the world really know about the investment game? Are they really that much more savvy and sophisticated than their working class lottery ticket buying peers? Or does their self-image as savvy sophisticates make them that much more prone to being ripped off? After all, Bernie Madoff was able to swindle a bunch of very sophisticated investors out of a great deal of money. He did it through actual, prosecutable, criminal fraud. But not every scam and ripoff is a fraud, and not everything that’s legal is a mutually beneficial transaction.

Median HH Income

Median income is down by 11% from its peak.  The median household is almost half way to the great depression. Felix Salmon:

Why has no one thought to do this before? Every month, the Current Population Survey goes out to a nationally representative sample of more than 50,000 interviewed households and their members. And in one of the questions, those households — or at least the households who didn’t answer the same question the previous month — are asked how much money they made, in total, over the past 12 months. That question has now been asked in 138 successive months, since January 2000. Which means that with a bit of clever analysis, it’s possible to put together an apples-to-apples comparison of what has happened to household income every month.
And when you do that, the results are very scary indeed.

 

...All of these numbers come from Gordon Green and John Coder, economists who both worked at the Census Bureau for more than 25 years. They’ve now set up a private company, Sentier Research, to collate these household income figures every month... Why is this work being outsourced to private-sector economists, rather than being done by the Bureau of Labor Statistics and published officially?

History of the 2008 Lesser Depression

This is an excellent history by Ezra Klein that explains what happened and the political struggles that shaped the outcome:  Could this time have been different?
Many commentators have critiqued Klein's article.  Krugman says Klein was not hard enough on Obama in a very I-told-you-so way that would be really annoying except that he really has been telling the same critique for a long time. He would never make it as a politician.  

IS LM Keynesian Links

Krugman Explains IS-LM

The BL-MP Model

 More on BL-MP

 IS-LM Watch: In the Country of the One-Eyed, the Self-Blinded Man Is in Bad Shape, or Something Department

The Tribal Dislike of John Hicks and IS-LM: History of Economic Thought Edition

 Hoisted from Comments: The Tribal Dislike of John Hicks and IS-LM

Something About Macro

Krugman: "I’d guess that at least half of university macroeconomists are either real business cycle types or take a Taylor-like position that they may be Keynesian in theory, but they oppose anything Keynesian in practice"

Krugman must be thinking about research macroeconomists in graduate schools.  The undergraduate textbooks never developed much interest in the real business cycle (RBC) theory.  Perhaps that is because RBC has no good applications and cannot be explained in simple terms that make any sense.  It requires too much mathematical abstraction to make sense and undergraduates would not be convinced without some stories to back it up. 

Regulatory Uncertainty Did Not Cause Recession

It's *Not* Regulatory and Tax Uncertainty.
If it were fear of Obama and Democratic policies, then the midterm elections would have seen economic boom because Democrats cannot do anything major anymore.
The recession would not have gone so far before Obama and the Democrats were elected.  
Business investment has already recovered more rapidly than it did in several past recessions.  Only housing investment remains depressed and it is difficult to understand why home buyers would be so worried about housing regulations when that is mostly regulated by state and local governments which vary widely in ideology and substance.

Mishel at the Economic Policy Institute has more:

Over at the American Enterprise Institute blog, James Pethokoukis responds to my recent paper, Regulatory uncertainty: A phony explanation for our jobs problem, and blog post. I presented evidence that trends in investment, private-sector job growth, unemployment, and work hours were not inferior in this recovery compared to other recent job-challenged recoveries. That is, I noted that this recovery fares well relative to the recoveries under George W. Bush and George H. W. Bush. If you look at what employers are doing rather than what trade associations are saying, you would see that uncertainty about regulations and taxation has not impeded job growth. What we are seeing is what you expect given the slow growth in GDP.
What was especially curious to me is that Pethokoukis has no counter-argument

Fiscal and Monetary Stimulus NOW!

Professional economic forecasters think that fiscal policy works: Paul Krugman directs us to a Goldman Sachs report.

http://www.project-syndicate.org/commentary/delong118/English  The calculations and logic of Keynesianism.
Martin Wolf:  Time to think the unthinkable and start printing again
a recent speech by Adam Posen (pdf), opens by speaking about how shy people are to do Keynsian or monetarist policies:

Both the UK and the global economy are facing a familiar foe at present: policy defeatism. Throughout modern economic history, whether in Western Europe in the 1920s, in the US and elsewhere in the 1930s, or in Japan in the 1990s, every major financial crisis-driven downturn has been followed by premature abandonment—if not reversal—of the macroeconomic stimulus policies that are necessary to sustained recovery. Every time, this was due to unduly influential voices claiming some combination of the destructiveness of further policy stimulus, the ineffectiveness of further policy stimulus, or the political corruption from further policy stimulus. Every time those voices were wrong on each and every count. Those voices are being heard again today, much too loudly. It is the duty of economic policymakers including central bankers to rebut these false claims head on. It is even more important that we do the right thing for the economy rather than be slowed, confused, or intimidated by such false claims.